More than meets the AI? Exploring key drivers for tech in 2024

  • 30 January 2024 (7 min read)

Key points:

  • Large-cap, innovative technology companies balance potential growth and volatility
  • Improving macro trends look positive for technology companies
  • Accelerating developments in AI, infrastructure, e-commerce, IT spending, accommodative regulation, and more may provide a rich source of opportunities for technology investors

Equities within technology markets can often stand out as a potential source of exciting long-term growth opportunities, albeit with some degree of volatility.  Choosing an actively managed technology strategy can help investors to access the potential benefit from experienced management teams and leading research capabilities. Such strategies may align with both investor growth targets and risk appetites, when focused on large-cap names with established business models, attractive fundamentals, and with the ability to reinvest significantly into future growth and innovation pipelines. However, the dynamic nature of the sector and its continued emergence of disruptive technologies means that the market is constantly adapting and evolving to embrace new opportunities.

While ongoing macroeconomic and geopolitical challenges continue to be of concern to investors, the growth potential of companies exposed to key technology themes remain intact, supported by long-term thematic drivers. Below, we round up some of the key reasons for optimism which we believe investors should consider across the spectrum of technology equity themes in 2024 – and beyond.


Artificial Intelligence (AI)

Starting with one of the most ubiquitous buzzwords within current technological developments, AI (and generative AI in particular) has advanced at an accelerated rate in recent years thanks to cross-sector advances, uptake, and investment, and has the potential to become pervasive. The generative AI subset is expected to automate tasks, significantly increase productivity, and add trillions of dollars in value to the global economy, according to McKinsey & Company.1  The current focus on applying AI functionalities within infrastructure such as cloud computing and data centres is expected to expand over time into those companies developing AI functionality into their applications. Given the broad number of use cases for AI to drive improvements in efficiency, we see good scope for growth in the long term.

Similarly, the Metaverse is at the forefront of a transformative journey where the physical and digital worlds seamlessly converge. The rapid development of generative AI over the past year has accelerated this convergence, paving the way towards a fully immersive experience. AI serves as the driving force which we expect to unlock unprecedented opportunities for companies, consumers, and investors, and which we view as playing a crucial role in converting creative concepts into highly realistic and immersive content and experiences.   This potential for impact extends far beyond gaming, reshaping social interactions, workplace dynamics and technological advancements. Businesses leveraging digital twins, powered by generative AI, experience faster and more efficient work processes. From product development to environmental simulations, the Metaverse is proving its versatility. For instance, the healthcare sector is harnessing virtual reality for training purposes or realistic patient-doctor interactions, while companies utilising AI are adapting more rapidly to evolving customer needs, tailoring personalised experiences and innovative offerings. 

Macro trends are improving

 Inflation, which peaked in June 2022, has come down meaningfully and continues to gradually cool down.  This has brought some stability to the overall market and increased comfort that the US Federal Reserve (Fed) has finished hiking rates.  After having risen from around 3.5%2  in early summer, US 10 Year Treasury yields touched a peak around 5%3   during October and declined quite meaningfully to 3.9% at the end of December 23. This continuing fall in bond yields was positive for investor sentiment for risk assets, notably growth equities. Ultimately, we believe that we are reaching an economic environment where inflation is gradually normalising, with the first interest rate cut expected by many in the first half 2024.  This should ultimately support a better environment for growth investments. Importantly for technology, eCommerce growth is returning to historical trends in a post-pandemic environment. Its adoption famously experienced strong growth during the COVID-19 crisis in 2020, with many consumers shifting to online channels for their shopping needs. However, as economies reopened in 2021 and 2022, the surge in eCommerce plateaued, leading some investors to question if the trend was fading. eCommerce penetration levels have now normalised and we anticipate a return to better growth trends in the future. Meanwhile, projections suggest that the Metaverse could generate up to $5 trillion4  in value by 2030, positioning it as an economic force comparable to Japan's entire economy. 

IT Spending

In their most recent forecast, Gartner predicts Worldwide IT spending grew 4.8% in 2023 (in constant currency terms).5  Their prediction for 2024 is 7.0% growth, with software leading this expansion supported by IT services and Data Centre Systems.  In 2023, spending on external IT Services has been larger than spending on internal IT services for the first time ever. Companies are now looking at consultants and specialized expertise for tasks requiring highly specific skills. As the convergence of the digital and physical worlds accelerates, the demand for new content surges, creating investment opportunities in semiconductor manufacturers and technology infrastructure providers. These companies play a crucial role in providing the necessary building blocks and infrastructure required to support growth. Growing complexity in virtual worlds requires increasingly advanced chips and tools, suggesting potential investment opportunities in the semiconductor industry and related infrastructure, including data centres. This is also the case within the robotics industry, where the importance of semiconductors and AI will become greater and greater, spanning into diverse areas like robotic surgery, machine vision, warehouse automation, and autonomous vehicles. Exciting innovation cycles, new product developments, and an anticipated cyclical upturn may all appeal to investors seeking growth.

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Digital transformation and Cloud adoption

Many companies are adopting new digital systems to improve efficiency. Cloud computing, and SaaS (Software as a Service) are gaining wider adoption as it is a better way for enterprises to buy and maintain their software purchases. Companies providing these services are seeing continued adoption supporting their growth, with SaaS spending expected to grow from $167.3bn in 2022 to $232.3bn in 20246 .  A recent survey from Morgan Stanley suggested that less than one third of application workloads currently reside in the public cloud, and this penetration could increase to 45%7 within two years.

Cybersecurity

As cyberattacks continue to become more frequent and sophisticated, businesses of all sizes are increasingly looking to invest in cybersecurity infrastructure to protect themselves and their customers. The cybersecurity market is expected to grow from $154bn in 2022 to $425bn by 2030.8  Additionally, businesses are now adopting real-time simulations of cyberattacks and investing in training for their employees. This trend is likely to continue as the global damage from cyberattacks is expected to amount to $10.5tn annually by 2025.9 Cybersecurity is often cited as a top three priority for CIOs and is also regarded as being an area of spending that is least likely to be cut in the event of an economic downturn.

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Government support provides safety

We are witnessing significant government supports shaping the trajectory of technology investment themes.  While Asia maintains its lead in the adoption of industrial robotics, major economies, including the US, are poised to increase investments in 2024. Landmark legislations like the Infrastructure Investment and Jobs Act (IIJA), Chips and Science Act, and Inflation Reduction Act demonstrate scale and ambition for a government commitment to bolster domestic technology capabilities. Government-backed capital expenditure, less sensitive to economic fluctuations, is driving large-scale project emergence, with the US at the forefront of reshoring and enhancing technological capabilities. Regulatory initiatives are also a welcome development for opportunities within the Metaverse, such as the opening in the US of the 6 GHz10 band spectrum for wearables, which illustrates a proactive collaboration between regulators and the industry. Major product launches, like Apple's Vision Pro (expected to launch in the US in early February 2024), highlight major players committing to mixed reality. While there are varying projections about the Metaverse's market size, the consensus points towards significant growth in the coming years, reinforcing the continued optimism.

Bottoming cycles

The International Federation of Robotics (IFR) forecasts that the demand for robot installations will diverge even in a potential economic slowdown and predicts a new worldwide annual installation record of over 600,000 units11 . Japanese machine tool orders can be used as a bellwether to assess where we are in the automation market cycle and suggest that we are hitting the bottom with a projected rebound in 2024-2025. Similarly, several key companies in the semiconductor space indicated that the semiconductor cycle had bottomed, thanks to the personal computer (PC) market stabilisation, and smartphone market recovery. Whilst we mention some of the exciting growth areas for semiconductors above (AI, datacentres, etc.) it’s worth remembering that PCs and smartphones represent around 50% of the total semiconductor industry, so improvement in these markets after a period of weakness is encouraging for the industry as a whole.

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Companies shown are for illustrative purposes only as of 29/01/2024. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.

Risk warning:
No assurance can be given that our investment strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to specific risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes, volatility risk, liquidity risk, credit risk, counterparty risk, derivatives risk, legal risk, valuation risk, operational risk and risks related to the underlying assets. Some strategies may also involve leverage, which may increase the effect of market movements on the portfolio and may result in significant risk of losses.

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